Use the following information to answer question 5 and 6 Dusam Company is constr

Question

Use the following information to answer question 5 and 6 Dusam Company is constructing a building, Construction began on January 1 and was completed on December 31. Expenditures were $2 400,000 on March 1, $1,980,000 on June 1, and $3,ooo,o0o on December 31. Dusam Company borrowed $1,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $2,400,000 note payable and an 11%, 4-year, $4,500,000 note payable, The weighted-average accumulated expenditures and the weighted-average interest rate used for interest capitalization purpose should be 5. C. D. $7.380,000 and 10.5% $3,690,000 and 11% $4,380,000 and 10.85% A. B. $3,155,000 and 10.65% What amount of interest should be charged to interest expense? A. $382,792 B. $735,000 6. C. $526,792 D. $415,192

Explanation / Answer

Solution 5:

Weighted average interest rate to be used for interest capitalzation purpose = 10% * 24/69 + 11% * 45 / 69 = 10.65%

Hence option B is correct.

Solution 6:

Interest for specific borrowing should be capitalized for entire year.

Interest on general borrowings = $2,400,000 * 10% + $4,500,000 * 11% = $735,000

Interest to be capitalized = ($3,155,000 - $1,200,000) * 10.65% = $208,208

Interest should be charged to interst expense = $735,000 - $208,208 = $526,792

Hence option C is correct.

Construction of Building Schedule of Weighted-Average accumulated expenditure Date Amount Current year capitalization period Weighted Average Accumulated Expenditures 1-Mar $2,400,000.00 10/12 $2,000,000.00 1-Jun $1,980,000.00 7/12 $1,155,000.00 31-Dec $3,000,000.00 0/12 $0.00 $7,380,000.00 $3,155,000.00

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